A Reassessment of the Egyptian-American Rapport
The recent events in Cairo brought me back in time during my years at the University of Chicago. My senior thesis in Political Science attempted to re-simulate history and introduce a unique counterfactual experiment on the Political Economy of Egypt.
The paper was written under the auspices of Associate Professor Lisa Wedeen and my econometric modeling was reviewed by several professors at the Economics department. The paper landed me an honors degree and provided new insight in to the existing literature.
My recent post, “US Takes Soft Yet ‘Calculated’ Approach With Egypt” touches on the current American-Egyptian relationship. The post and the recent events encouraged me to bring back in to light the arguments posed in my thesis. I was brought back in time because I closely examined the history of the Egyptian-American relationship on both an economic and political stance. Here is a quick summary:
1) I argue ceterus paribus using a counterfactual analytical framework that Egypt’s economic growth rate would have been higher today had Nasser’s independence from Western influence, his aspirations to self-manage the Egyptian political economy, his centralized government and his controlled efforts at liberalization (starting in 1967) been continued after his death.
2) I argue that Anwar Sadat’s rapid liberalization efforts starting in the 1970s failed. I rank the accumulation of debt as the number one chronic problem affecting the economy. Debt became a massive problem once the United States Agency for International Development (USAID) mission entered in to the Egyptian economy in 1975. The analysis focuses on the impact of the aid on GDP growth rate, the expenditures on consumption as well as income inequality (measured by the Gini).
3) I argue that it was Sadat’s proclivity to allow the US to intervene in Egyptian affairs which brought in the USAID mission whereas on the other hand, it was Nasser’s nationalistic policies which minimized foreign direct intervention (vis-à-vis Sadat). The focus of this argument is on the difference between both leaders’ relationships with the US.
4) I argue that it was Nasser’s centralized government which promoted its growth in size and expenditure. Furthermore, I argue that Nasser’s increases in government expenditure led to the phenomenal annual increases in GDP growth. This argument assesses the significance of Egypt’s three main wars of 1956, 1967 and 1973 in order to compare both leaders’ government expenditure – focusing on the military component
There is a casual relationship between Egypt’s economic indicators and the USAID military and economic aid packages. An increase in both the USAID military and economic aid packages respectively affects GDP growth rate and consumption expenditure negatively. With its bias towards multinational US firms and with over 50% of the aid-funds spent in the US, it is hard to see how the aid has been beneficial to the country. The aid has slowed down internal growth, decreased the rate of consumption expenditure and accumulated debt. In addition, the aid package has also not contributed to Egypt’s internal development whatsoever. For example, Egypt’s Gini coefficient (a measure of income inequality) on five year increments starting in 1975 has a 0.42 positive correlation with USAID military aid, implying that income inequality within the country and military aid increase simultaneously.
From 1975-1989, 58% or $8.7 billion of all US economic assistance was spent directly in the US rather than on development projects in Egypt, in fact most of this American aid represents money paid by Egypt to America. Moreover, the remaining 42% of the US economic aid package ($6.3 billion) was allocated for development projects within the country but none of the money was transferred directly to Egypt. It was the American contractors in Egypt such as General Electric, Westinghouse and Overseas Bechtel who were the beneficiaries in fact almost every penny of the $15 billion budget during 1975-1989 was allocated to them.
The Egyptian-American relationship is not as mutual and not as transparent as one might perceive. Last September, an Egyptian delegation attempted to persuade the American government to halt the military aid which Egypt has not been benefiting from (in time of peace), however, the Americans responded negatively by arguing that Egypt needs to maintain its military power and continue to spend numerous amounts of money on US military equipment.
A close reassessment of the relationship reveals that the US has a hidden agenda with regards to its strategic alliance with Egypt. Its constant fueling of economic and military aid has made Egypt more dependent on the US and made it harder for the country to forgive the aid package. One should think carefully about further allowing the US to meddle in Egyptian affairs, more than it has at this point.
The paper was written under the auspices of Associate Professor Lisa Wedeen and my econometric modeling was reviewed by several professors at the Economics department. The paper landed me an honors degree and provided new insight in to the existing literature.
My recent post, “US Takes Soft Yet ‘Calculated’ Approach With Egypt” touches on the current American-Egyptian relationship. The post and the recent events encouraged me to bring back in to light the arguments posed in my thesis. I was brought back in time because I closely examined the history of the Egyptian-American relationship on both an economic and political stance. Here is a quick summary:
1) I argue ceterus paribus using a counterfactual analytical framework that Egypt’s economic growth rate would have been higher today had Nasser’s independence from Western influence, his aspirations to self-manage the Egyptian political economy, his centralized government and his controlled efforts at liberalization (starting in 1967) been continued after his death.
2) I argue that Anwar Sadat’s rapid liberalization efforts starting in the 1970s failed. I rank the accumulation of debt as the number one chronic problem affecting the economy. Debt became a massive problem once the United States Agency for International Development (USAID) mission entered in to the Egyptian economy in 1975. The analysis focuses on the impact of the aid on GDP growth rate, the expenditures on consumption as well as income inequality (measured by the Gini).
3) I argue that it was Sadat’s proclivity to allow the US to intervene in Egyptian affairs which brought in the USAID mission whereas on the other hand, it was Nasser’s nationalistic policies which minimized foreign direct intervention (vis-à-vis Sadat). The focus of this argument is on the difference between both leaders’ relationships with the US.
4) I argue that it was Nasser’s centralized government which promoted its growth in size and expenditure. Furthermore, I argue that Nasser’s increases in government expenditure led to the phenomenal annual increases in GDP growth. This argument assesses the significance of Egypt’s three main wars of 1956, 1967 and 1973 in order to compare both leaders’ government expenditure – focusing on the military component
There is a casual relationship between Egypt’s economic indicators and the USAID military and economic aid packages. An increase in both the USAID military and economic aid packages respectively affects GDP growth rate and consumption expenditure negatively. With its bias towards multinational US firms and with over 50% of the aid-funds spent in the US, it is hard to see how the aid has been beneficial to the country. The aid has slowed down internal growth, decreased the rate of consumption expenditure and accumulated debt. In addition, the aid package has also not contributed to Egypt’s internal development whatsoever. For example, Egypt’s Gini coefficient (a measure of income inequality) on five year increments starting in 1975 has a 0.42 positive correlation with USAID military aid, implying that income inequality within the country and military aid increase simultaneously.
From 1975-1989, 58% or $8.7 billion of all US economic assistance was spent directly in the US rather than on development projects in Egypt, in fact most of this American aid represents money paid by Egypt to America. Moreover, the remaining 42% of the US economic aid package ($6.3 billion) was allocated for development projects within the country but none of the money was transferred directly to Egypt. It was the American contractors in Egypt such as General Electric, Westinghouse and Overseas Bechtel who were the beneficiaries in fact almost every penny of the $15 billion budget during 1975-1989 was allocated to them.
The Egyptian-American relationship is not as mutual and not as transparent as one might perceive. Last September, an Egyptian delegation attempted to persuade the American government to halt the military aid which Egypt has not been benefiting from (in time of peace), however, the Americans responded negatively by arguing that Egypt needs to maintain its military power and continue to spend numerous amounts of money on US military equipment.
A close reassessment of the relationship reveals that the US has a hidden agenda with regards to its strategic alliance with Egypt. Its constant fueling of economic and military aid has made Egypt more dependent on the US and made it harder for the country to forgive the aid package. One should think carefully about further allowing the US to meddle in Egyptian affairs, more than it has at this point.
posted by The Egyptian Observer at 10:32 PM
7 Comments:
I must say that that's a very interesting thesis. I agree that Sadat's policies following the October War, notably his increased reliance on American aid, increased income inequalities which subsequently lead to food riots, and arguably, led to Sadat's own assassination as a result of growing fundamentalism. I was just reading a book by Mohamed Hassanein Heikal (called Autumn of Fury), where he argues that the worsening economic situation prompted Sadat to try and appease the ever growing power of islamists, in order to secure his power base in the country.
However what I find hard to believe in your thesis, is that if we had continued with Nasser, things would've been hunky dory. As you mentioned, your analysis was conducted on a ceteris paribus basis: however we all know that in real life, several variables change simultaneously, and even the most mathematically complex econometric models would struggle to account for such real life scenarios. Furthermore, it's conducted on a counterfactual basis: no offense here my friend, but this is like fiction, or at best, it's plausible fiction. The law of unintended consequences, and the impossibility to account for all the intra-variable connections, render such analysis speculative at best. It's not that the technique itself is invalid (Nobel laureates like Robert Fogel have occassionaly used it), however its strong limitations must be acknowledged.
It's definitely true that accumulation of debt was a problem. The IMF basically sent down orders to Egypt to reduce its debt, which in turn forced the government to reduce its subsidies on bread, prompting the food riots.
And while true, that Sadat's policies brought in foreign direct intervention, Nasser's ones were not a whole lot better. Nasser liked to use a lot of nationalistic rhetoric, but in reality, the country was loaded with Soviet "advisors". Sadat simply substituted one devil for another. At least, the Americans were kind enough to shower us with the most advanced military capabilities (a la F-16s), when our airforce following the 1967 disaster, that thanks to Nasser's big mouth materialized, was almost completely destroyed. There is a reason for why Sadat kicked the Soviets out: they were useless.
One reason that Nasser's policies led a huge increase in GDP, vis a vis Sadat, is that the country was following a growth curve. Between 1956 and 1967, the country was free of any wars, and with projects like the Aswan Dam, there were a lot of potentialities to be realized. However when Sadat came into power in 1970, the country was demoralized and expenditures into massive projects (like the Aswan Dam) could not take place while a military campaign was raging on, during the war of attrition.
I know that Sadat's policies didn't work in his own day. I do not dispute your statistics, although I do dispute the accuracy of the methodology employed to compare growth in the Nasser and Sadat eras, as mentioned above. However looking back more than 20 years later, I realize that Sadat was a true visionary. The Soviet Union was abolished, and America became the sole superpower. Countries that didn't sign peace with Israel (and in the process, obtaining American Aid) are imploding from the inside (think of Syria). The US definitely uses Aid to exert power on Egypt, however I'd argue that this power is minor at best. After all, if Aid was such a powerful tool, we'd be basking in the heaven of democracy in Egypt, which we're not.
A Fellow Egyptian
@anonymous. Thank you for your comments/critcisms and opinions.
First let me define my ceterus paribus assumptions:
1) Assumption One: During both the Nasser and Sadat periods, other nations’ economies were undergoing liberalism at their own rates (either faster or slower than Egypt) and the forces of globalization were present. Moreover, I acknowledge that countries were shifting from a command, socialist-style system to a more open, liberal economy.
2) Assumption Two: Other countries (in the exception of China, Cuba and the Soviet Union at the time) perceive that Western-liberal style democracy is the most desirable political-economic system (i.e. imitation of the US and the West exists in the international system).
3) Assumption Three: Nasser had the intention of liberalizing the economy (as it had already started in 1967) but wanted to keep it at a controlled rate. Moreover, he sought liberalization but wanted to maintain independence from the West and especially the US.
Second, I certainly acknowledge the limitations of the analysis and the paper meant to shed a light in to 'what would have happened.' Using econometric models to define public policy is limited since causality and not only correlation needs to be proven. I have taken numerous classes with Professor Robert Fogel and he has used econometrics in a plethora of his work to substantiate his points but again makes sure to draw its limitations.
Nasser did not only use nationalistic rhetoric but injected an incredible sense of nationalism in the people at the time and was successfuly able to nationalize the Suez Canal and kick the occupiers. In a sense, even though the Soviet Union used Egypt as a conduit for Cold War diplomacy against the US, the Egyptians still benefited from them in several ways. This ranged from lenient debt repayment terms to the supply of arms (i.e. Czech arms deal).
Counter to your statement, I in fact prove that the 1956 and 1967 wars stimulated economic growth in Egypt's economy and both powers fell under the Nasser reign. I used the theories of Sam Peltzman (University of Chicago) and Robert Barro (Harvard University) to show how during times of war, government expenditure spikes up to accomdate for the cost of war which in turn induces higher output and economic growth. However, the fact that wars existed under Nasser is only coincedental to the argument, what is more important is Peltzman's theory that the more centralized the government and economic system, the higher the economic growth potential.
Here is my logic:
(1) Once Nasser came to power, there was large private income inequality due to the remnants of the British colonial rule therefore this called for political redistribution, (2) Nasser's charisma coupled with his efforts to equalize private income among society led to a significant popularity with the masses inducing political redistribution. Nasser also took a grand initiative in bringing private business in to public ownership and his activities resembled a 'socialist-style' centralized-government system, (3) the highly centralized government under Nasser persevered throughout his era and sprouted its growth and (4) the growing government under Nasser witnessed massive expenditures.
The fact that aid is a VERY powerful tool has allowed the US to leverage its political power against Egypt. They do not intend to use the aid to infuse ideals of democracy per se, that just does not work and this will not make the Egyptians bask in to a heaven of democracy.
But, one could argue that it is in the interest of the Americans to maintain a certain level of 'backwardness' in Egypt as they understand its potential political and economic power (from historic events) and would not want it to reach its full potential (especially if the MB will take power) so that no potential adversary rises against Israel.
These are speculations at most, however a very close assessment of the donor-receipient relationship is incredibly surprising, it has been retarding the economy than actually promoting any Egyptian-germained growth.
Thanks for taking the time to write such a detailed reply. Let me start by noting that I agree with your last point that it's not in the interest of America to infuse the ideals of democracy in Egypt, at least at this point in time. They might in fact not be interested in making Egypt realize its full potential because it might harm their interests, namely our relationship with Israel. On the side, I frankly am not sure whether the rise of the MB will harm Egyptians themselves more, but that's a separate issue.
But again, Egypt currently possesses the second most powerful military in the region thanks, in no small part, to American aid. Would it have been possible to possess such capability without US backing, and with the demise of the Soviet Union, our main arms supplier? I frankly don't think that our antiquated MiGs or some other chinese-made equipment would stand a chance in war versus the vastly superior American equipped Israeli military. Furthermore, you might counter by proposing that the Soviet Union would've continued financing us, however, as you know, with their breakup, they couldn't be less interested in exerting the remenants of their power and financing the militaries of other countries in order to counter balance the US, while Russia itself is battling its own set of severe economic problems. Of course whether Sadat saw that in advance, or whether it was a stroke of luck, is arguable.
While I am not familiar with the theories of Peltzman and Barro per se, they seem to be based on a Keynesian paradigm, where increased government expenditure stimulates aggregate demand and in turn, growth of the economy. However, the dispute now is at a much more fundamental level than our simple political arguments: in fact, if you work under the classical school of economics, then Ricardian Equivalence kicks in, and you can argue that the massive expenditure incurred during the Nasser era resulted in massive debt for the future generation, not because of Sadat's policies, but rather because of Nasser's previously uncontrolled spending.
If you work under the hypothesis that Aid " has been retarding the economy than actually promoting any Egyptian-germained growth", do you propose cutting the Aid now? And if so, how should Egypt finance its extremely generous subsidies, that without, will probably lead to massive riots on the scale of the 1977 ones? While you've provided an argument for the negative impact of the introduction of Aid, I am curious to know your position on it at this point in time, now that it constitutes a lifeline to our economy.
@anonymous. The US has certainly been a key factor in increasing the strength of Egypt's military however in a zero-sum game. Since, we use the money the US provides us to buy their own weapons, they essentially have incredible control of our military might.
In essence, they are ensuring that Egypt remains an incredible military ally and moreover an ally they HAVE CONTROL over - militarily and economically. Yes, it was the US which made Egypt's military strong however at a very high political cost.
There is certainly a large debate in the literature as to whether increased government spending actually leads to economic growth. In my paper, I discuss that under certain conditions, will temporary increases in military expenditure reflect positively on the growth of the economy (this is taken straight from Barro as he acknowledges the debate and the intricacy of forming a strict causal relationship between both variables). Barro also mentions how patriotism plays a crucial role in the success of war and this played well in the close analysis of the wars during Nasser’s period. In essence, as you raised in your comments, it is difficult (in retrospect) to decide whether in fact the increase of government spending under Nasser reflected negatively as opposed to positively on economic growth however my own analysis as proved the latter.
If my analysis were to affect public policy in Egypt, it would point to these changes:
1) Curtail military aid or completely eliminate it. Egypt remains in times of peace and there is no reason to pump up the military full-throttle. Since the nature of antagonism has been between state and non-state actors (i.e. terrorists), full-fledged military is not needed to solve the problem. Moreover, since Egypt remains at peace with Israel, it makes more sense to focus on improving the economy rather than wasting the money improving the military.
2) Egypt should slowly decrease the amount of aid it receives from the US and lag until it is able to pay off all its debt and until then stand up on its own two feet and close the USAID program. This process could take 50 years or more and so an alternative would be to re-allocate the USAID money from American to Egyptian projects. This will encourage domestic Egyptian-led growth without the need of any American help – i.e. it will be authentic and ‘native’ growth.
3) As for the subsidies, Egypt is well capable of providing its population with staples such as wheat and we do not need the food program to feed the citizens. However, again the dismantling of such a program needs to take place gradually.
An abrupt change in any of the points listed could potentially lead the country in to financial crisis and so the changes need to be gradual. The US needs to acknowledge that Egypt can stand on its own two feet and its policies (if truly benevolent) should allow Egypt to solve its own problems and find its own path for success and growth.
I am not happy about our dependence on American aid, and I largely agree with your conclusions regarding how it should be reduced. I was just reading today a report on Congress evaluating whether they should renew Aid, and some congressmen uttered statements like "The time has come to seek greater returns from our investment in Egypt", as if Egypt was their "fathers' farm" to use an egyptian term that sounds a lot more expressive in its original form.
http://www.alertnet.org/thenews/newsdesk/N17296931.htm
I do however think that maintaing a constant level of military expenditures is crucial; after all it's the Middle East where war can flare in a second. We need to have a consistently strong deterrent force. It strikes me as non-coincidental when Tom Lantos, the ranking Democrat on the Senate foreign relations commitee and an ardent supporter of Israel, focuses most of his efforts on reducing military aid specifically:
" Lantos has led an unsuccessful two-year effort to shift some of the military aid to Egypt into economic and political development assistance".
http://www.washingtonpost.com/wp-dyn/content/article/2006/05/12/AR2006051201786.html
There exists a fundamental dichotomy in economics with regards to the keynesian/classical arguments,rendering it impossible to satisfactorily solve it in a blog. But at the end of the day, we can agree to disagree on some issues. I think your analysis is very well thought of, and your blog reveals careful reasoning.
Always looking forwards to more.
A fellow Egyptian
I forgot to include something in my last posting: when you read the washington post article, you'll find that Lantos argues that military aid has been diverted and served as a "political entitlement" program for mubarak. As if Lantos is the hero for democracy. Reading the first paragraph of an article published in Haaretz, the Israeli newspaper, reveals otherwise however:
http://www.haaretzdaily.com/hasen/pages/ShArt.jhtml?itemNo=214159&contrassID=2&subContrassID=6&sbSubContrassID=0&listSrc=Y
Regardless of the source of the money, Egypt cannot afford to reduce its military expenditures. Israel would love nothing more than to see a military power differential open up with its largest arab neigbour.
@Fellow Egyptian. Thank you for the links, these stories are absolutely pertaining to our discussion and shed some interesting light on to the subject.
It is true, one cannot assume that Lantos is acting in Egypt's self-interest given that he is an ardent supporter of Israel. However, it is true, Egypt is no longer in a conventional warfare threat whatsoever. In addition, the fact that Israel has nuclear technology also makes it miles ahead of Egypt in terms of military might.
These statements are quite strategic. On the one hand, I would agree with Lantos that honestly the military aid could very well be used in economic and development projects. On other hand, the fact that he is an ardent supporter of Israel makes me suspicious. However, regardless of his statements and persuasions, I still believe that Egypt does not need to keep boosting its military entitlement (in a superficial manner) but rather focus more on developmental projects.
The Middle East is certainly a very unpredictable region and instability is profuse. Egypt needs to have sufficient military might for emergencies. IF the country truly seeks to maintain its might vis-a-vis Israel then it needs to acquire nuclear weapons (which would be HIGHLY UNLIKELY) in order to ensure Mutually Assured Destruction (MAD) and that the two countries would resort to conventional warfare (if the situation ever arises).
Mubarak is considered rational whereas Ahmadinejad irrational (in the eyes of the Americans) and thus this could be the only way in which the US would allow nuclear technological advances in Egypt to occur. However, given the liabilities inside Egypt's borders, this is definitely a cause for much concern - i.e. terrorists getting a hold of them etc. the Americans would certainly think twice about that.
The first article clearly shows blatantly the obviousness of the US' agenda in Egypt. In essence, they believe it is their farm and that they seek to obtain as much from it as possible. This is not AID but 'fake funds' that exploit the government and make Egypt jump on the US' bandwagon.
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